Social Security Benefit Valuation, Risk, and Optimal Retirement
29 Pages Posted: 16 Aug 2019 Last revised: 2 Sep 2019
Date Written: August 13, 2019
We develop techniques to estimate the present day value of the future social security benefits of a retiree based upon their chosen date of retirement, the term structure of interest rates, and life expectancy forecasts. These valuation methods are then used to determine the optimal retirement time of a beneficiary given a specific wage history and health profile in the sense of maximizing the present day value of future cashflows. We then examine how a number of risk factors including interest rates, disease diagnosis, and population life table risks impact the current value of future payments. Specifically, we utilize principal component analysis in order to assess interest rate and population life expectancy variation risks. We then examine how such risks range over distinct income and demographic groups and finally summarize future research directions.
Keywords: social security, principal component analysis, pension risk
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